A traditional cost segregation study allows companies and individuals who have constructed, acquired, or remodeled real estate to increase cash flow by accelerating depreciation deductions and deferring income taxes. Cost Seg+ is a more comprehensive approach that leverages the constantly changing IRS regulations, construction financing, and advancements in design & construction to maximize cash flow to you or your clients.
EXPENSE VS. CAPITALIZE
In a Cost Seg+ study, a licensed professional engineer with design & construction experience should review the construction/acquisition/improvement project and understand how it is financed, designed, and built in order to determine what costs can be immediately deducted. A thorough understanding of the tangible property regulations will help in categorizing costs as repairs (even if done in conjunction with capital improvements), dispositions, deductible transactions, and de minimus and safe harbor costs. Minimizing the costs that need to be capitalized is the first step in maximizing cash flow.
Sec. 179 EXPENSE & BONUS DEPRECIATION
A powerful tool that should be used to avoid long depreciation periods, particularly for significant improvement projects (including leased property), is Sec. 179 Expensing and Bonus Depreciation. The value of each varies by year, but for 2015 there is potential for increasing deductions on certain new and used equipment by as much as $500,000 through Sec. 179 (with $2M phase out), and 50% of the remaining cost through Bonus Depreciation.
179D & 45L ENERGY EFFICIENT INCENTIVES
Tax deductions of up to $1.80 per square foot for commercial buildings, and tax credits of $2,000 per unit for apartments/condos absolutely have to be considered in a Cost Seg+ study. In a traditional cost segregation study these valuable incentives are often overlooked or excluded because they require a licensed professional engineer to develop an energy model and certify the building. For example, that would mean leaving a $90,000 tax deduction on the table for a 50,000 square foot building or $200,000 in tax credits for a 100 unit apartment! These incentives apply to new construction, acquisition, and improvement/retrofit projects.
A proper study will reclassify property from 39 or 27.5 year recovery periods into 5, 7, and 15 year periods as prescribed by IRS guidelines. A detailed engineering analysis should be performed and classify property into appropriate units of property so that when they are replaced, a deduction can be claimed. Again, using a licensed professional engineer with experience in design and construction is key to getting this right.
The goal of any Cost Seg+ study is to maximize cash flow and withstand IRS examination. A study should be backed by licensed professional engineers and tax professionals that have experience with design and construction as well as the tax code, tangible property regulations, and the cost segregation audit technique guidelines. A comprehensive, auditable report should be backed by sound engineering and crafted to advocate for the client.
There are many cost segregation providers. You should ask them if they are simply reclassifying property into accelerated recovery periods or using professional engineering and design/construction experience for a more comprehensive approach that maximizes the benefits to you or your clients.
Kevin is a licensed professional engineer in over 30 states with 10+ years experience in design and construction who dedicates his time to supporting CPA’s and their clients in taking full advantage of all federal and state tax incentives, credits, and deductions available to them.